Issuu on Google+

119


120

The Entrepreneur’s Path

On many days, being the founder and CEO of a company is a solitary job. You can discuss a lot about business with your management team. You certainly want their perspectives and input, but you can’t tell them everything. This is especially true when the company is facing very tough trade-offs, considering strategic alliances with service providers and suppliers, making decisions about compensation, establishing employment policies, or dealing with sensitive personnel matters. It is important to build relationships beyond your company with people you know you can trust. Your relationships may be informal with former professors, advisors, and/or mentors. They may come about through your participation in community organizations, such as the Chamber of Commerce and other economic development groups. They may be formalized through a Board of Advisors or prescribed by laws governing Board of Directors. The relationship you have with your board of directors is arguably one of the most important relationships that an entrepreneur develops as he or she is building a company. Yet many entrepreneurs don’t have any experience working with boards. They often don’t understand a board’s role, legal obligations, or capacity to help the company gain traction and grow.


7 THE RELATIONSHIPS 121

This chapter begins with purposeful networking and then covers board of advisors. However, our primary focus is to provide ideas to help you create the right board of directors for your company and then develop the processes and tools to work smoothly and effectively together to grow your company. Purposeful Networking for contacts and key hires

Opportunities for networking come along every day, from organized events to casual encounters. In fact, there are so many ways to network that you could spend all your time doing that instead of testing your product, writing your business plan, practicing your business plan presentation, or talking to potential customers. And this is the point. Building contacts and relationships within the entrepreneurial ecosystem is critical to the success of new companies. Time management is more critical. Be a community partner. Don’t wait until you need information or help, and especially don’t wait until you begin fund raising, to get know other business people and entrepreneurs.


122

The Entrepreneur’s Path

When you attend a networking event, introduce yourself to at least three people you haven’t met before. Ask them what they do and why they are there. Exchange business cards. This is the perfect time to practice your elevator pitch, but be sensitive and do not dominate the conversation. You are trying to establish contacts and relationships for the future, not prove that you are entrepreneur of the year.

If a person is interesting, either as a human or as a business contact, follow up your initial meeting with an email, phone call, or invitation to coffee. Set a weekly goal of two to four of these follow up activities. Create a system (beyond your iPhone) for recording information about the people you meet.

You will be surprised at how many people are interested in and willing to help entrepreneurs. You may find a mentor or two. When it comes time to raise money, identify a critical hire, or when you need a personal reference with a bank, you can turn to these people for help and advice. Many providers recognize the financial limitations that entrepreneurs face. They may offer pro bono services or reduced rates to entrepreneurs they know and trust, recognizing that as new companies succeed, they can become long-term, profitable clients.


7 THE RELATIONSHIPS 123

For example, you, like almost every entrepreneur we have met, will need the help of a well-qualified chief financial officer (CFO) long before you can afford to pay for this skill full time. If you don’t know exactly what a CFO does, use your contacts to meet and talk with one to find out. While your company is still in the Proof-of-Concept Stage, begin looking for an individual with financial skills who would be willing to work with your company part-time or on a consulting basis. This is not the time to rely on a family member, friend, or intern who has an accounting degree or a non-financial professional with the company to manage the books. An additional resource is a business incubator or economic development organization in your area. Get to know the people there. Business incubators are typically staffed by professionals who understand the challenges faced by an entrepreneur. Not only do incubators offer shared space at very reasonable rates, they are staffed by professionals who understand the world of the entrepreneur. Incubators also provide a feeling of community with other entrepreneurs. Board of Advisors

While you are in the Proof of Concept or early Seed Stage, before your company has outside investors, you may choose to operate with a board of advisors. A board of advisors is a small group of people you know and trust who have knowledge and experience that is relevant to you your business. They might be individuals in the market you are seeking to serve. They may have technical,


124

The Entrepreneur’s Path

financial, or human relations expertise. They may be entrepreneurs themselves who have successfully started and exited companies or former mentors or professors. Many entrepreneurs find this an effective way to begin to learn how to operate with a Board and a way to identify and “road test” potential future directors. Having an advisory board, especially if one or more of the participants are well-known and respected in the industry or market you are trying to serve adds instant credibility. This is especially true for companies in technology, medical devices, or life sciences. Unlike boards of directors, boards of advisors do not carry legal or fiduciary obligations. You can organize and staff an advisory board in the way that is most helpful to you and your business goals. Typical advisory boards have three or four members who have the time to serve. Although they are often more than willing, it’s usually not the best idea in the world to create a board of advisors made up of friends and family members. The same goes for employees. In addition, be sure to avoid any conflicts of interest. Meet with your advisory board periodically with a well-defined agenda. Consider compensating them for their preparation time and participation in board meetings. Individuals of this caliber are in high demand. They have other jobs and commitments.


7 THE RELATIONSHIPS 125

Certainly many advisors feel a psychic reward in helping a young company gain its legs, but financial compensation can keep the relationship going when the advisor’s interest declines or other demands take priority. Building a Board of Directors

Corporations are required to have a board of directors elected by the stockholders. Once you secure outside funding, term documents will require the company to have a board of directors. Board Responsibilities

Boards of directors have legal responsibility in the form of fiduciary duties which include duty of care and duty of loyalty. They are obligated to protect and grow the corporation, always act in the corporation’s best interests, to hold to the company’s mission, and never engage in any conflict of interest or use any information obtained for personal gain. Boards of directors don’t have the power to sign contracts or commit the corporation legally, but the board does elect the corporate officers (including you) who are responsible for running the business day to day. An effective board aligns financial and strategic expectations of the company within the board and with the CEO. The board and the CEO understand and agree with the expectations of the other. Most of the board’s activities should be directed toward building the company.


126

The Entrepreneur’s Path

The goal is to increase the value of the business and support the activities that will lead to achieving the agreed upon milestones in the fastest and most efficient way possible. Although angel investors and venture capitalists will almost always require one or two seats on the board as a condition of funding, as CEO, you can influence the make-up of the rest of your board. Start by imagining the kind of talent you would like to have accessible to you. Could your company use more financial expertise? Marketing savvy? Experience in dealing with the Department of Defense, the FDA, or in a particular market? Use your full board when raising capital. They can help when talking to angel investors or venture capitalists. They can be adept at negotiating valuation and board sets. It is heartbreaking to see a CEO not in lockstep with the board on fund raising. We’ve seen companies struggle and even fail when the CEO insists on keeping the board at arm’s length.

Boards accomplish things when the members either have or can build good working relationships. Look for people who are collaborative with strong personal networks and problem-solving experiences. Prior board experience is beneficial. Find people with strong respect for customers and for what it takes to build a company from scratch. You want at least one person on your board who understands that a CEO’s job can be the loneliest job in the world.


7 THE RELATIONSHIPS 127

Board Size

There is no restriction on the maximum number of board members. There are sometimes minimums, which may vary by state. For small companies, five (including the CEO) is a good number to start. As your company grows, you may choose to expand your board to seven seats. Have an odd number of board members to prevent deadlock and ties. A company needs only as many members as it takes to provide the expertise you need. As with advisors, forget about family members, friends, or employees. You need expertise on your board; you don’t need a rock star. Don’t invite a big name, just for the sake of the name. You want directors who have time to devote to your company. Build and prioritize a list of candidates. Use your executive summary and business plan as the basis for your discussions with these people. Share your vision and plans for the company. Arrange contact with existing board members or investors. Explore whether the candidate has the time and geographic availability to serve. The very process of speaking to people about serving on your board may reveal additional candidates.

You don’t have to reinvent the wheel. Study the boards of other companies in your industry. Talk with attorneys, CPA, bankers, and consultants. Look to individuals who have experience in your industry.


128

The Entrepreneur’s Path

A smooth working board of directors will make your company stronger. A weak board will tie your hands. But, don’t forget. Your actions as CEO influence board behavior as well. Rules for the Board

Create a working environment that allows the board to serve your company at each stage of the Entrepreneurial Path. It is helpful to prepare a written document, sometimes called Delegation of Authority, which defines the CEO’s and Board’s roles. The document will state which CEO decisions require board approval, including dollar limits. Establish term limits up front before you fill out your board. Some term limits may be tied to investors’ terms, but the company can set non-investor term limits, and you should. As the company progresses from Seed to Startup to early Growth and the role of the board changes, the definition of CEO and board roles may need to be modified, too. Every board needs a chairperson. This can be the CEO, but it doesn’t have to be. The board chairperson and the CEO will jointly develop the agenda for board meetings.


7 THE RELATIONSHIPS 129

Board Meetings

With Seed to early Growth Stage companies, monthly board meetings are common. It is up to the CEO to set the format and tone to make the meetings effective and productive. Begin by creating clear guidelines for board meetings. Ask other entrepreneurs or trusted advisors what they have seen work. Schedule the calendar a full year in advance and hold the dates sacred. Have in-person meetings if at all possible. Online meetings are a great time and money saver, but there is no substitute for building a terrific working relationship face to face. It is wise to discuss every topic with every board member before the meeting. This saves meeting time, and gives you the opportunity to answer questions, hear objections and suggestions, and revise your action plans and recommendations based on what you learn. Follow the good practices you learned when you were writing your business plan. Summarize your update to the board and provide the goals for the meeting on the first page of the board materials you send out. At the start of each meeting, summarize the company’s overall goals, strategy, and tactics. Don’t assume that your board members will remember details from meeting to meeting–especially the numbers. However, they all know how to read financial statements so put the financials in the board material, and limit the financials in your board presentation to one summary slide.


130

The Entrepreneur’s Path

When possible, include your management team in board meetings. They will benefit from direct interaction with the board, and the board will get to know them and appreciate their competency. These exchanges also help your team be more individually accountable to the board. You can have closed sessions before or after the meeting. The format for board meetings often includes ending with an executive session without management attendance. After that, you and your board chair should meet to discuss the results of the meeting and next steps. These days, comfortable dress is often appropriate, but that doesn’t mean that your board presentation or approach to board meetings should be casual. Stand up and take control of the meeting. It’s yours. Be a tad on the formal side. Don’t ever be defensive with your board. Effective board members don’t want to run your company or take over your job. They want to use their experience and contacts to help you solve problems, meet milestones, and achieve the objectives you mutually hold.


7 THE RELATIONSHIPS 131

Board communications – written and otherwise

Send out board materials at least forty eight hours in advance of each board or board committee meeting. The first page in the package should be a summary that includes: • • • • • • • • •

Technology development timelines Sales statistics, including significant contracts Product rollout status Status of major initiatives Changes in key customer or business partner relationships Significant changes in market or competition Financial Statements Legal or accounting issues Personnel issues – key hires, departures, anything that can impact the business plan

Establish a regular pattern of communications between formal board meetings. Call board members. Ask their advice. Keep them informed of major developments as they occur. Focus on Financials

A one page financial statement is handy for your board and to use inside the company as well. You and your board can come up with a suitable format. Your financial one-pager will include a balance sheet, profit and loss, and cash flows, with the major emphasis on cash. Include data from previous reporting periods.


132

The Entrepreneur’s Path

Be sure to notate slippage in schedules, money, contacts, hiring, etc. from board meeting to board meeting. Represent the key spending areas and your burn rate. If your business has significant investments in equipment, include that. Be sure to report bookings or cancellation of contracts, headcount by department, and updates on significant events impacting the current summary over the last one. Board Minutes

Board meeting minutes are the official record of what transpired during each board meeting. They should be reviewed for accuracy and approved by each board member and then filed in a safe place with other permanent records. Corrections or additions to the minutes should be raised at the next board meeting. Minutes can be used as evidence in legal proceedings. It is advisable to sit down with a trusted advisor to understand the level of detail appropriate for board minutes. Although board minutes for private companies are not public documents, upon sale or acquisition of the company or other “exit” scenarios, the board minutes will be reviewed in detail as part of due diligence. It is always good to consult your attorney for help establishing these parameters at the beginning of the company’s life. As the company grows, you will want to consider a legal secretary for the board.


7 THE RELATIONSHIPS 133

Board Minutes – the minimum • Name of the organization • Location, date, and time of meeting • Board members in attendance, excused and absent • Other attendees • Existence of a quorum • Description of agenda item and board action

As your company progresses from Proof-of-Concept to the Growth Stage and you make key new hires or reward existing employees, you will be coming to your board (or the compensation committee of the board) for approval of grants of equity. Develop a standard format for making these requests that includes the most current capitalization table, even if it hasn’t changed. Put each grant and each planned recipient in context compared to previously awarded grants. Be prepared to discuss the contribution and performance of anyone on the table. Your board may ask. Here’s an example of how to present the information to your board: Name

Position

#of shares perecnt ownership

#existing shares/% vested

range

By following a standard procedure, you teach your board what to expect, make the information readily available, and create a discipline for yourself and your company that will result in a smooth timely granting of shares. This enhances your credibility with your employees and your board.


134

The Entrepreneur’s Path

Board Compensation and Directors’ Insurance

If you want an active engaged board, compensate them. Cash compensation for board service in an early company is not desirable. Options align the board with management. It is common to award one-time options in the range of .25 to 1 percent of the outstanding company stock with the options vesting annually over two to five years. Make it clear up front how the vesting will work if the member leaves the board. Investors (angels and venture capitalists) serve on the board as dictated by their investment. They do not receive additional equity or compensation. Always reimburse board members for reasonable and actual expenses. Reasonable means expenses that conform to the company’s typical practices. Everyone, board members included, must be mindful of cash in early companies, and if they aren’t, you might have the wrong board member. Ensure that the charter of your company contains a specific clause that limits directors’ liability and that corporate documents provide indemnification protection so that if a claim is made, the director is reimbursed for costs and possible judgments. Then expect to provide directors and officers liability insurance (D&O) so that board members and their assets can be protected.


7 THE RELATIONSHIPS 135

Board actions are measured against the legal standard of reasonable care. The board demonstrates performance of the duty of care with minutes, notes, expert opinions, and advice from independent consultants. This is especially true when discussions and decisions have to do with selling the company. Conclusion

Building contacts and relationships within the entrepreneurial ecosystem is critical to the success of new companies. Close and trusting relationships with individuals who bring a different perspective will help you create a better, stronger company and will benefit you personally. Network with purpose. When it comes time to raise money, identify a critical hire, or when you need a personal reference with a bank, you can turn to these people for help and advice. An entrepreneur’s relationship with the board of directors can be one of the most beneficial tools a new company has to gain traction and grow. Equity investors will require one or two board seats as part of the terms of the deal. Often these individuals will be persons involved in due diligence and/or the negotiation of valuation. Remember this, and don’t burn your bridges.


136

The Entrepreneur’s Path

Boards of directors are obligated to protect and grow the corporation, always act in the corporation’s best interests, to hold to the company’s mission, and never engage in any conflict of interest or use any information obtained for personal gain.

KEY POINTS

Build purposeful relationships within the business, academic, and entrepreneurial communities from day one. Don’t wait until you need it to ask for help and advice. Invest time and thoughtful preparation in building a board of directors. Be totally professional and respectful in every interaction with your board, from memos to formal board meetings. Your board is your ally. Ask for their help, and then take it. Effective CEOs work closely and well with their Boards.


Ch 7 The Relationships